TOP 10 CHALLENGES FOR INVESTMENT BANKS

Getting Fit: Aggressive Cost Reduction

Investment banks have been pursuing cost reduction for years. What will it take to achieve sustainable cost efficiency?

Investment banks have faced a challenging landscape over the past eight years, characterized by declining revenues, high costs, developments in digital and regulatory pressure—and the changes could continue. Through it all, the drive to reduce costs has been constant. And it might not go away: the focus on cost reduction remains razor sharp as companies continue to seek sustainable cost efficiency.

Governance, leadership and culture matter

Leadership matters. After an examination of the cultural and institutional personas of successful and unsuccessful cost reduction initiatives, we believe that the pre-requisites for success should include:

A top-down mandate that crosses business and operating silos and enforces a “bank first” view rather than a desk or product orientation

A truly front-to-back process to help verify that costs are truly understood, solutions address root causes and downstream effects are minimized

A deep understanding of costs and their drivers

A re-examination of what’s important to own and what customers will pay for

A plan for the savings generated—whether that’s offsetting costs or investing them to generate new revenue

Non-differentiating custom development and on-premise capabilities can account for up to 40 percent of IT and operational costs at investment banks.

Building blocks for change

Many banks still may need to rethink their business models in parts or as a whole through:

Further simplifying operations

Establishing alliances with fintechs, other banks or players from other industries

Redefining the role of the bank and tapping into the wider ecosystem

Embracing utilities

But before transitioning to an ongoing spend-and-performance management technique, they must first undergo a cost-resizing exercise.

New digital technologies are not only disrupting traditional sources of competitiveness, but also raising the bar on what’s possible and setting new benchmarks for cost reduction. Cloud-based services and the “everything-as-a-service” model could be redefining how investment banks approach their operating models and IT systems.

The average large investment bank could save up to 11 percent in run-rate costs by moving from a private model to a public cloud-based model.

How masters of client experience play to win

Digital, new consumer expectations and increased scrutiny are disrupting an already complex worldRedefining the terms and boundaries of competitivenessCompetitive agility is defined as winning simultaneously across three dimensionsDISRUPTIVE SPEEDGROWTH AND CUSTOMERNEW CONTESTABLE MARKETSPROFITABILITYSUSTAINABILITY AND TRUSTRADICAL TRANSPARENCYVOLATILITY UNCERTAINTY COMPLEXITY AMBIGUITYVOLATILITY UNCERTAINTY COMPLEXITY AMBIGUITYDigital, new consumer expectations and increased scrutiny are disrupting an already complex worldRedefining the terms and boundaries of competitivenessDISRUPTIVE SPEEDNEW CONTESTABLEMARKETSRADICAL TRANSPARENCYCompetitive agility is defined as winning simultaneously across three dimensionsGROWTH AND CUSTOMERGrowth and innovation engines,exploiting the ecosystemPROFITABILITYCapabilities, cost base and operating modelSUSTAINABILITY AND TRUSTSecuring licenseto operate and license to grow

The new digital ecosystem requires strategic investing

The new digital ecosystem offers many opportunities to reduce costs and generate new revenues, but this requires a strategic approach to technology investments for banks that could include the following:

Fintech partnerships that supplement their offerings and increase efficiency

Next steps

Adopt a new performance anatomy

Understand and leverage rapidly maturing digital technologies

to drive efficiency gains instead of using backward-looking benchmarks that could underestimate the need for—and potential value of—change.

Adopt an approach to cost reduction

that balances all three dimensions (growth and customers, sustainability and trust, profitability) of competitive agility.

Conclusion

Over the next decade, investment bank leaders who are seeking sustainable cost reduction should try to strike a balance between optimizing the existing core and investing in what’s new.

In the short term, that means finding opportunities to simplify, rationalize and automate, while at the same time clarifying—and changing if needed—the business model, moving toward a client-led approach and building a strong network of alliances. In the long run that could mean eliminating legacy systems, adopting blockchain and shared digital infrastructure, and refocusing human resources.

By moving beyond tactical cost reductions towards more strategic initiatives, investment banks might not only reduce costs and improve efficiency, but also set themselves up for sustainable growth in the future.

Challenge Highlights

Is digital technology the key that will help investment banks transition from ongoing cost-cutting to sustainable cost efficiency?

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